The Government Once Built Silicon Valley

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Editor’s note:Vitaly M. Golomb is a Ukrainian-born, Silicon Valley-bred entrepreneur and investor. He is the Founder/CEO of Keen Systems, GP of CEED Valley Ventures, and a speaker, adviser, and mentor who visits 15+ countries and their startup ecosystems every year.

In May, I received an invitation to participate in the “Startup Global Design Workshop” hosted by the White House Business Council and Business Forward. The organizations are working on bridging the gap between entrepreneurs and Washington.

Currently, small-to-medium-sized enterprises are responsible for 98 percent of U.S. exports. As part of the President’s National Export Initiative, this event was an effort to determine how American startups can be made aware-of and interested in exporting more and sooner.

A small number of forward-thinking venture capital firms like DFJ and 500 Startups have looked outside Silicon Valley for some time. More recently, even Y Combinator has realized it needs to get out of its Silicon Valley comfort zone and take advantage of worldwide talent and growing markets.

Looking at the stats, it is only surprising that most Silicon Valley VC firms are still only willing to make investments within an hour’s drive of their Sand Hill office:

95% of the world’s consumers live outside of the U.S.

1 billion consumers worldwide will enter the middle class in the next 15 years – 80% of this growth will be outside of the U.S.

Though only 1 percent of U.S. companies export, 2012 was a record year with $2.2 trillion

Decades and generations of specialization have concentrated the financial industry in New York City, the entertainment industry in Hollywood, and of course the center of the startup universe in Silicon Valley. That last one was no accident.

How Did We Get Here?

It all got started when Fredrick Terman returned to Stanford with 11 top researchers from the Harvard Radio Research Lab (which arguably helped the allies win the WWII air war over Europe). He landed the first government contract in 1946. By the start of the Korean War in 1950, Stanford was the single best prepared institution to help NSA, CIA, and various military branches on classified Cold War technology research.

The U.S. government soon became Stanford research’s biggest customer. Terman, whether out of brilliant insight or philosophical conviction, simultaneously created a path and motivation for his students to form companies rather than staying in the university setting to perform pure research and collect degrees. Thus, the Bay Area quickly moved from apple orchards to becoming Microwave Alley and spawning companies like Varian.

In 1955 (the same year Terman became provost of Stanford) William Shockley, who ran military research for a decade and a half and co-invented the transistor (Nobel Prize 1956), came to the Bay Area and created Shockley Semiconductor – the first semi conductor company. Shockley’s “Traitorous 8” employees famously left to start Fairchild. From that spawned 60+ chip companies by the time the likes of Apple rolled around 20 years later.

By the mid-50s, the first Silicon Valley IPOs like Varian and HP began attracting the attention of east coast “risk capital” investors and the first Bay Area angel investors. In 1958, the Small Business Administration (SBA) created a 2:1 fund-matching program to encourage venture capital investment – for every dollar invested, the SBA would grant two. In 1978, the government slashed capital gains taxes and allowed pension funds to invest in venture funds. This created an inflection point for the venture capital industry and grew it 10-fold overnight.

In the period starting with the close of WWII to the late 70s, the U.S. government created ideal economic conditions for technology innovation and commercialization to thrive in Silicon Valley.

By the early 90s, when it was time to commercialize the next technology wave — the Internet — Silicon Valley was already on the fourth generation of technology entrepreneurship. With that experience and specialization came an ecosystem full of engineering and technology sales and marketing talent, service professionals, investment firms and entrepreneurs turned angel investors. Most importantly, a scientific approach to entrepreneurialism of experimentation with no stigma or fear of failure.

The U.S. Government Tech Assistance Program 2.0

From the outside, it seems Silicon Valley has it all figured out. There is, however, one problem any VC or experienced entrepreneur will gladly complain about to anyone who will listen.

At a time when there is arguably too much investment money providing ample ammunition in the talent war, finding, affording, and retaining top technical talent is hands-down the hardest task any company that has found its market has to deal with.

This phenomenon also happens to be the biggest inflationary issue in the entire ecosystem driving up salaries and substantially reducing capital efficiency for investors. It artificially inflates valuations and even has a hand in gentrification and the rise of hipster communities like San Francisco’s Mission District.

From the macro perspective, it is easy to see why the federal government measures success in exports. From the startup perspective, we care far more about being able to reasonably make and iterate products first and foremost.

Herein lie my suggestions on how the U.S. government can help its own export goals and the preservation of Silicon Valley’s – and by extension, America’s – leadership position in technology. Focus on immigration reform and Science Technology Engineering and Math (STEM) education.

For hundreds of years, the U.S. was the nation of immigrants. Somehow in recent times, immigration has become a cornerstone issue for conservative politicians. They’ve twisted it into the “enemy of jobs” instead of the economic driver and job-creator it has always been. As a result, the U.S. regularly kicks out brilliant foreign engineers who would gladly stay to start companies as soon as they finish their education.

To add insult to injury, it is difficult, costly, and extremely time-consuming to attain work visas for even the best and brightest who share in the American dream but were born in the wrong country. So countries like Canada are happily taking all of our brilliant rejects and benefiting from their entrepreneurial efforts.

Education has also become heavily politicized and increasingly more – instead of less – difficult to attain. At a time when an investment should be made into basic science and math, starting in grade-school, municipal educational budgets are being cut.

By the time these kids graduate, few have the grounding required to go into technical fields. Even if they are fortunate enough to get into a competitive technical degree program, they will be saddled with debt for years to come — a more effective deterrent than most realize.

What most politicians fail to understand, or at least act on, is the fact that the make up of the workforce has to evolve with the times. One shouldn’t need any more evidence than the most recent “jobless recovery”. Having effectively given up manufacturing to other, lower cost-of-living countries, intellectual property development (mostly technical) is America’s future.

A New Focus On Silicon Valley

For the last several decades the U.S. government has been taking Silicon Valley, its primary growth engine, for granted. Technology is a proud talking point for politicians, yet there is a severe lack of resource allocation and participation in the ecosystem.

Representatives of the U.S. Patent and Trademark office will be quick to point to their Silicon Valley branch; however in the era of “software eats the world”, not only does the patent process move on a glacial time-scale but patents themselves have become almost irrelevant compared to the make-or-break importance of customer traction.

Government can serve as important connective tissue here by establishing and funding a different type of Silicon Valley presence; staffed by leaders in the technology and entrepreneurial community who are respected by the startup inner-circle and know where to apply resources effectively. Much like sophisticated, value-add investors are “smart money” this can be “smart government”.

Direct paths could be established to educational institutions from public grade schools. This knowledge can then be propagated to the rest of the country where today Silicon Valley might as well be a foreign planet.

Partnerships could be made with top accelerators to provide their participants unparalleled distribution akin to what is done in many, more motivated, countries today. This innovation office can also take an active role in the numerous technology conferences and events as a valued contributor and not just occasional participant.

Connecting Startups To Foreign Markets

Knowing where the hot foreign markets are, the U.S. Commerce Department has an opportunity to create economic mission offices, providing U.S. startups and more mature companies direct access to growing regions.

Crucial local ecosystem partnerships can be established, maintained, and offered as a resource for U.S. entrepreneurs. Imagine deciding to explore a market like Brazil for instance, making one call, and a week later having a guest office to land in and a Rolodex of vetted partners offered-up for meetings. Outside of consultants who will take the watch off your wrist to tell you what time it is, this is something only a government agency can provide.

Another overlooked area where a government agency can provide unique value is in foreign market operations. Startups usually ignore foreign markets until much later, in large part due to the time needed to understand and setup local operations, hiring, and IP protection. Most countries want the custom of U.S. companies and if a U.S. agency can help simplify the logistics, entrepreneurs would take advantage of the opportunities sooner. A special, turn-key trade agreement whittling down months of local hoop-jumping down to a one-page form would do wonders here.

Overall, export is good for the U.S. economy. In a world of increasing specialization, Silicon Valley and technology innovation are the U.S. growth-drivers for the foreseeable future. Yet the U.S. is stuck in second gear when it comes to supporting our industry in the right way. It has not been about monetary support for a long time. Instead, substantial efforts need to be invested in education and immigration reform to solve the talent dilemma.

The U.S. government also has the power to accelerate the pace at which domestic companies go global. All of this just needs to be done in concert with the brilliant minds that turned apple orchards into a digital goldmine.

Much can be done and I’m hopeful the right partners will get involved on the government side. I will welcome and support them and I hope you will too.